THE PLANK MARCH 24, 2009
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Simon Johnson is a professor at MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is co-founder of the global economy website, BaselineScenario.com.
The administration’s media rollout of the Geithner Plan was as meticulously coordinated as a Super Bowl Sunday. In future courses for doctors of spin, there will be a special session on the administration's dogged attempt to get everyone together and work every segment of its increasingly fragmented viewership. Calls were even made to economic bloggers to “give Tim a chance.”
But economics is a much tougher business than football. A big market jump on Monday is not victory, and you don’t get to go home after breaking the record for collective charisma points earned in a 24-hour period. Instead, you start to face the difficult and more technical questions (which don’t always fit the format of Sunday talk shows). Is there really a master plan? Something consistent with the administration’s principles could look like this:
1. Announce the toxic assets purchase plan.
2. In the new budget, obtain the money needed for recapitalizing banks--so that once banks sell bad assets and recognize losses, they can get new capital from the government.
3. Announce stress tests (i.e., evaluations of what banks’ balance sheets will look like if the economy remains in trouble) that are tough on banks--this will force them to raise capital and sell assets, otherwise they will sit on the stuff for years.
4. Use the budget money to recapitalize banks as needed using preference shares. This is a way to put in taxpayer money while preventing the government from taking majority ownership (and the administration feels strongly about this; I’ve asked).
5. Make sure to get the toxic assets off banks’ balance sheets at the new, low, reasonable prices.
So far, the administration has stopped at point 1. Unless there is a somewhat miraculous end of the credit crunch, this is almost certainly not enough. That's why the Geithner plan feels more like political maneuvering ahead of the G20 summit next week and a way to maintain the impression of progress rather than a real, long-term plan.
There is nothing wrong with hoping that the Geithner plan works, of course. But for me to believe that we're approaching anything close to a solution, I’d need to see the administration be tough on banks--the stress tests in point 3 above are crucial--and Monday's announcement was instead very nice to bankers.
--Simon Johnson
35 comments
Too bad there isn't a number 6: Put people in jail (remember when Milken of junk bond fame was sent up the river?).
No one seems interested in connecting the dots to organized crime, looking into Joseph Cassano (AIG) and his connections to Milken, and all of the money laundering done through those mysterious hedge funds. We're not just bailing out the banks, we're bailing out the Mafia.
- fougasseu
March 24, 2009 at 12:52pm
It was private investors' arbitraging of the state, specifically the policy of artificially cheap credit + lax regulation, that got us into this mess.
So why the hell are Geithner/Obama setting up yet another heads-I-win-tails-the-gov't-loses arbitrage for powerful and well-connected private investors?
Why is our government determined to play the role of Buffett's patsy at the poker table? Whom do they work for?
- teplukhin2you
March 24, 2009 at 12:58pm
Goldman and Morgan Stanley's delight. Each one is up >90% since Obama/Geithner took office in late Jan.: http://tinyurl.com/cj6ecn
Let's just dispense with the fiction that Treasury works for us. Amend the constitution so that Tiny Tim's Treasury can function freely as the pocket bank for Government Sachs, Morgan States, the Republic of PIMCO and United Buffett-Soros.
- teplukhin2you
March 24, 2009 at 1:10pm
I think we all need to abandon the hope that anyone will go to jail over this. Considering how the administration is handing the banks with kid gloves, nobody will given so much as a slap on the wrist. Like Paulson before him, Geithner is Wall St.'s BFF and would never, ever let his buddies on the Street face the consequences for their actions.
- csmiller
March 24, 2009 at 1:10pm
I second Tep's pitchfork. Someone's making some serious money.
- The Ignorant Populist
March 24, 2009 at 1:32pm
At least they should make the preference shares convertible to common on some basis rationally related to market values so that when the time comes for the government to sell its position, it can reap the benefits of the risks taken by the public via dilution.
But, the truth is that there does not seem to be any disposition to do anything other than give money, billions and billions of public dollars, to owners and managers of financial companies. The mistake is in thinking that these guys don't want to give away the store but feel they have no choice. The reality is that want to give away the store, so they can be paid off later when they retire from government, and are delighted to have the cover of the economic crisis with which to do it. The fracas over the AIG bonuses was but a small hiccough along the way, a speed bump, the occasional little outburst of public sentiment that just happens once in a while but ultimately means very little. Let's face it, our government is owned, lock, stock and barrel by capital. Barney Frank, Schumer, it's all the same. The good guys want to see ordinary people get a better deal, a bit of a break. The bad guys don't give a damn. But they are all content with the fact that they work for the dons of capitalism.
Is there a name for our form of government in which the forms of democracy are observed while all meaningful power lies with money? If so, I don't know what it is, but there should be one.
- roidubouloi
March 24, 2009 at 1:38pm
Corptocracy Roi.
- The Ignorant Populist
March 24, 2009 at 1:57pm
roi - that's easy: Oligarchy. This is what prevails in Russia, the middle east, most of Latin America, including the pseudo-socialist states like Chavez's Venezuela and Fidel's Cuba, where the oligarchs wear fatigues.
Oligarchy in the present environment denotes that polity where the commanding heights of the economy are controlled by a few actors who move frictionlessly in and out of the halls of political power.
The main political idea of the oligarchs is of a continuum between the state and private enterprise. Unlike fascism, which seeks to organize and co-opt powerful private groups (labor, industrial sectors, the church, etc) into "corporate" entities existing in uneasy harmony with the reigning political party, the oligarchs have little interest in society as such and are motivated less by power than by the desire for financial gain. They are happy to preserve a two- or multi-party system, so long as each side recognizes that political power is merely a stepping stone to the lucrative, state-affiliated key industries of investment banking and political lobbying.
While the twin oligarchic parties in this country fight bitterly over social issues, on the core issue of access to financial power, the parties share a fundamental belief that the state is subservient to financial interests which themselves are viewed as the the key driver of economic growth and the ultimate arbiter of wise policy.
Some oligarchs extend this belief further to the idea that the nation = the state, and that those who control the state-- the permanent political class, which rotates in and out of power into lobbying firms and corporate suites closely aligned to the state-- have sole authority for the state's direction, scope and resources. In this political model, the public is redirected away from fundamental economic and financial discussions toward socio-cultural battles via feigned outrage, "dog whistles", phony controversies.
in sum, the animating principles of Oligarchy are:
-- lack of transparency
-- redirecting the public gaze to non-economic issues
-- the blurring of the state and the private financial sector
-- sweetheart $$$ deals for the permanent political class
Meanwhile, our government-as-Davos model proceeds apace, with each party ensuring that it can land safely in a seven- or eight-figure salaried position for an investment or lobbying firm, as Rahm Emanuel, the Bojangles of the Banking Business, did in 1998 when he shlepped his DNC donor rolodex to an investment fund for $18m in three years, or Tom Daschle did in 2006, on his way to $5m in quick money, or Donna Shalala and Walter Mondale did, as directors of that poster child for corporate misgovernance and theft, UnitedHealth, or the new ass't HHS sec'y, Ms DeParle did when she left the public sector to run an fund investing in, you guessed it, health care companies, or....
- teplukhin2you
March 24, 2009 at 2:03pm
"Is there a name for our form of government in which the forms of democracy are observed while all meaningful power lies with money? If so, I don't know what it is, but there should be one."
In ancient Athens, this was called "tyranny." (See 'Peisistratos')
In Republican Rome, this was called "clientage." It went under various disguises in the Empire.
- timteeter
March 24, 2009 at 2:08pm
For 'clientage', make that 'clientela' if you're checking Wikipedia.
- timteeter
March 24, 2009 at 2:20pm
In the Vatican, it was called nepotism.
Crossposting: what's the difference between Obama Administration and an eventual McCain Administration?
Both campaigned against "Wall Street"...
But on the rest the same applies: same extorsion, same "cash for trash", same "socialism for the rich", same belief in "trickle down" from the financial sector, same concentration on what (supposedly, only SUPPOSEDLY...) "works" against every other consideration (for instance, same total carelessness for legitimacy issues, same building of a society in which it is rightly felt that virtue doesn't pay and the smartasses get their way...), same drug (compromising the future at all levels, economic and political, by having the Chinese financing the excesses through debt buying)...
- luispc
March 24, 2009 at 2:27pm
God damn it that's a savage post Tep. I've waited over two years for you to join our private property is theft eat the rich feed them their children illuminati under your bed red or dead workers paradise to hell or to Connaught side.
- The Ignorant Populist
March 24, 2009 at 2:28pm
Excellent post Tep.
- luispc
March 24, 2009 at 2:36pm
Do not trivialize Iggy. The times are grave. It's public-spiritedness and not communism!
It's the salvation of the Republic and of citizenship against evil oligarchy in it's kleptocratic form!
- luispc
March 24, 2009 at 2:46pm
Thanks, Tep, for ruining my day with your deadly accurate post. (Sigh)
- csmiller
March 24, 2009 at 2:47pm
Clarity is the first step towards reform.
We have a two-party system on the culture wars. We have a one-party Oligarchy as regards the commanding heights of the economy. Once people see and accept this reality, they can figure out how to get beyond the culture wars and start talking about how to take back our economy from the NY-DC Oligarchs.
- teplukhin2you
March 24, 2009 at 2:56pm
Commissioner Luis, welcome Tep to the Party and issue him his papers. Our plan to Europeanise the Anglo-Saxon barbarians is on schedule. If we can convince a true blue American like Tep of the merits of our five year plan for Soviet reforms then we can report excellent progress to the motherland. Now, we just need to get Hog elected.
- The Ignorant Populist
March 24, 2009 at 2:58pm
Louis, the most valuable sense of humor is the kind that enables us to see instantly what is not safe to laugh at.
- The Ignorant Populist
March 24, 2009 at 3:00pm
Another example of how Oligarchy differs from fascism. For fascists, of course, issues of race, creed, folk, gender and generation/miscegenation are all core. As I mentioned, for the oligarchs these are what marxists would call "epiphenomena", or what I would call "redirects", like the popup on your computer screen that bounces you into the domain where the company serving the web pages wishes your attention to focus.
Beyond such optics, the cultural preferences of the twin Oligarch parties are without major differences.
Oligarch X supports the teacher's union but sends his kids to the same $27k/year private academy as does Oligarch Y, who opposes the teacher's union. Oligarch Y supports severe abortion curbs and opposes gay marriage, even though he openly supports his daughter's lesbian union and would gladly arrange a discreet abortion for her should she have an unwanted pregnancy.
Oligarch X supports unions, so long as they don't organize at any of the companies in the portfolio of the private equity firm of which he's a director. Oligarch Y, while singing hymns to free enterprise before the Elks Club, works furiously as a lobbyist for mega-firms seeking state subsidies and other aid that will help them crush smaller rivals.
We are all (wannabe) Oligarchs now.
- teplukhin2you
March 24, 2009 at 3:11pm
"the most valuable sense of humor is the kind that enables us to see instantly what is not safe to laugh at."
How true.
Great Tep! You really do sound like a cultural critic strongly influenced by the Frankfurt School ;))
Now seriously: the times are grave. Down with the kleptocrats! Long live the Republic!
- luispc
March 24, 2009 at 3:38pm
Savage indeed, tep, and dead-on balls accurate.
Okay, I've learned something today. We are living in an oligarchy that seems to be distinguished from Russia only by a much stronger, but far from absolute, commitment to the rule of law that requires the oligarchs to observe legal norms, and lose a small battle here and there, rather than simply resorting to violence. I must say, I had naïvely continued to believe that we had a two party system, one the party of kleptocrats and the other of somewhat hapless do-gooders who routinely mistake their own good intentions for reality but turn into cold-eyed realists when our backs are really against the wall. It seems the hapless party of my memory, the one that did ameliorate the Depression, won the Second World War, and contained the Soviet Union long enough for it to collapse, no longer exists.
Like you say, tep, we all belong to the Oligarchy party now because it is the only game in town. Just when you think you are too old and cynical not to have any more naïve delusions, you find out you do. I am grateful that Obama got rid of the Republicans who are lunatics. I am disappointed to discover that he and his minions are, in the end, just the current rotation of the Oligarchy. At some point during the campaign, I commented that I felt as though I was living through the decline and fall of the Roman Empire, the corruption, the clientism, the loss of the will to succeed. It still feels that way. I suppose I should not spend any more energy worrying that the Oligarchy is going to give away the store to Wall Street because, of course they are going to give away the store to Wall Street. That's what Oligarchs do, give away the store. Nor should we expect that there will be some huge backlash of public opinion. A spasm or two perhaps, but that is all.
- roidubouloi
March 24, 2009 at 3:44pm
In the prologue to "Shield of Achilles", published in 2002, Philip Bobbitt discusses the rise of the market-state, and how markets are not very good at assuring political representation or giving equal voice to every group. He says that "unaided by the assurance that the political process will not be subordinated to the most powerful market actors, markets can be targets of the alienated and of those who are disenfranchised by any shift away from national or ethnic considerations". Sounds pretty prescient
- bl462
March 24, 2009 at 4:10pm
roid - a name for our form of government? Crony Capitalism.
en.wikipedia.org/.../Crony_capitalism
I also agree with tep, completely, that we are moving quickly to an oligarchy. Underpinning all of it is Crony Capitalism.
Someone said, "The difference between genius and stupidity is that genius has its limits."
Just what are the limits to Geithner's ambitions? What isn't he going to fix?
- fougasseu
March 24, 2009 at 4:13pm
re: fougasseu, "....Just what are the limits to Geithner's ambitions? What isn't he going to fix? "
Macbeth:
I have no spur
To prick the sides of my intent, but only
Vaulting ambition, which o'erleaps itself,
And falls on th'other. .
- bl462
March 24, 2009 at 4:32pm
Crony capitalism is the essence of Oligarchy. As racism is to fascism.
- teplukhin2you
March 24, 2009 at 4:35pm
The cronyism is the least of it, small beer. The laws and official acts the reward favored firms and classes with billions and now trillions are the real shame. This does not depend principally on direct acquaintance of any one member of the elite group with the others.
- roidubouloi
March 24, 2009 at 4:54pm
Tep - Here's a piece on Crony Capitalism penned by Joseph Stiglitz, which has an interesting reference to Robert Rubin and his efforts to help Enron....
www.project-syndicate.org/.../English
- fougasseu
March 24, 2009 at 4:54pm
Well, not to leave y'all on such a sad note, at least the Oligarchs and Davosians know how to party, sort of: www.youtube.com/watch
Ah, that reminds me: in addition to the redirect, another favored technique of the Oligarchy is the provision of compensatory Bread and Circuses to keep a restive public off the money trail.
In the US, that ruse consists of serial asset bubbles which enable each rung of society to fix its attention on the next, higher rung, which it is encouraged to believe can be grasped with a little bit of speculation.
Just as little boys are encouraged to mimic their sports heroes, undereducated proles can dabble in residential real estate speculation and vault themselves up to the middle or upper middle class. Overeducated lawyers, doctors and intellos who'd otherwise resent the far wealthier, and less educated and less intelligent oligarchs are easily bought off with the promise of doubling their investment holdings in the stock market and also playing the real estate casino. At all levels of the ladder, a crap culture borrowed from (c)rap music focused on the gangster ethos of gaudy consumerism encourages everyone to load up on purchases of shiny junk they don't need with money they don't have.
All of the above is enabled by the Oligarchy's deliberate policy of artificially cheap credit made available to the proles as a way of, again, _redirecting_ them from the reality of stagnant wages, sh*tty public schools, outrageously expensive and unreliable health insurance, and the lack of any security or stability in any of the markets-- job, stock, real estate-- which wreak havoc on the lives of the proles.
Slight problem for the Oligarchs now is that their crony capitalist games continue apace, but the grist for the bread mill, cheap credit, is gone. How you gonna keep 'em down on the Circuit City when CC's belly up?
Ah well, we'll always have Dancing with the Oligarchs. Fearless prediction: we wills e a tripling in the % of Americans who in one way or another act as servants to Oligarchs-- not just domestics, contractors and makers of luxury items, more ike members of foundations and nonprofits funded by the generosity of a swelling gazillionaire class whose interest in politics, as we've seen with the young turk hedgefunders who overwhelmingly backed BHO, is increasingly rapidly.
So we'll see not just the Ford Foundation, Rockefeller, Pritzker, Gates/Buffett, Macarthur etc old line firms but a mass of new foundations funded by 30-something and 40-something Up and Comer Oligarchs who secretly wish they were advising Obama. Bright children will want to work for these foundations that give respectability to the Oligarchy and an unparalleled degree of job and financial security to the proles who snag positions in them.
Eventually, this part of the economy will be larger than the media sector, which in former times would have absorbed these well-educated products of the better schools. The media will be run as a public trust, and will focus mainly on non-financial, non-economic subjects that do not threaten the Oligarchy's source of income: environmental policy, for ex., and other issues which affect old economy manufacturers which are of little interest to the finance, lobbying and greentech-inclined Oligarchs.
Take home exam will be passed out at our next session. Class dismissed.
- teplukhin2you
March 24, 2009 at 5:10pm
Can you slow down Tep. I'm trying to get this down...Oligarchs divided by Proles squared by cheap credit. Are you going to hand out hardcopies, or do we have to take notes?
Forceful, brave posting today. There's a whiff of gunpowder in the Talkback air. A nice antitode to the disapointing, trivia, personality soap opera and WH economic spin that constitutes The Stash so far. Hopefully, Noam can put aside any fears over his credibility and access to the Obama admin and start asking hard questions and exploring real alternatives.
- The Ignorant Populist
March 24, 2009 at 7:10pm
This discussion is entertaining and perhaps even carthartic. But it would make no sense and carry no weight without the predicate that had been laid by the analyitical discussions that have occurred in the Stash. There is also a bit of hyperbole here. It is nothing new - and even the "proletariat" understands this -- that government serves the interests of big corporations and the financial sector. This is true regardless of whether Democrats or Republicans are in power. Government largesse toward big business is sold to the public on the premise that wealth will "trickle down" to small business and individuals. It is interesting that this appears to be coming to some of you in an ipiphany of some sort.
But "oligarchy"? On a smaller scale, that is a bit like positing a conspiracy between the FDA and the pharmaceutical industry to suppress natural, non-patentable substances from entering the market. There is plenty of incentive for the drug industry to do that. And it may be that some of the FDA commissioners have buddies in the drug industry or hope to secure lucrative consultancies in the drug industry upon retiring from government. So while it is plausible that there may be some collusion, to hypothesize a full-blown conspiracy is to evince paranoia. So too, the hypothesis of an oligarchy involving the financial sector strikes me as paranoid. In particular, I find it difficult to believe that Obama is motivated by a desire to help the financial sector at the expense of taxpayers. But he may not be listening to the right people. We shall see.
- dhurtado
March 25, 2009 at 7:44am
Well, dhurtado, this is indeed a discussion that sloshed over from the Stash, a discussion in which most of us have been participating. It is easy to forget where one thread ends and another begins.
Of course there is hyperbole, but I don't think you need to posit direct, Dick Cheney-style conspiratorial conversation (although that undoubtedly occurs) to understand how an ostensible democracy can in fact be an oligarchy in which monied interests control the outcome in most cases of concern to them, public be damned.
Through a web of family and social relations, propinquity and shared entertainment, campaign contributions, implicit promises of future wealth (reinforced every time a Rahm Emanuel leaves government and promptly "earns" $18 million), and the occasional demonstration of the power to destroy a career, government officeholders at all levels come to see the interests of the monied elite as being co-extensive with the interests of the public, the latter-day version of, "What's good for General Motors is good for America." Throw in literal corruption, of which there is plenty, gerry-mandering and flawed vote-counting, of which there is plenty, and the highly limited access to the now enormous stash of funds required to mount a competitive election campaign and you have all the elements necessary for oligarchic power without any need to suppose secret handshakes and clandestine meetings.
- roidubouloi
March 25, 2009 at 9:05am
It is impossible to know what Obama and his economic advisers really think about any of this, whether they are terrified or in the thrall of Wall Street, ideologically committed to the same free-market religion that created the crisis, pushing the limits of the politically possible with shrewd pragmatism, engaged in a deep plan beyond our understanding, or just willing to spend public money in any way they legally can, in whatever amount, wasteful or not, necessary or not, to bring an end to the recession.
I am heartened, however, to read today that, in the wake of Monday's big gift to Wall Street and the encomiums from the market, they are aggressively pushing for the power to take control of failing financial institutions. If they could have taken control of AIG, rather than just paying it ransom, I have no doubt that the threat that it posed and still poses to the system could have been met at a far lower cost to the public, if any.
- roidubouloi
March 25, 2009 at 9:58am
Glad to see you've all become libertarians!
- ds111
March 25, 2009 at 5:18pm
Hold your horses, Tep. You are about to go off a cliff.
While there are certainly monied interests, of all political stripes, there is also intense competition between them, and between those not insignificant interests, investors, small businesses, unions, enviros, etc that shape our collective destiny much more strongly than any supposed olilgolipoly. But the more power rests in DC, the more these "monied interests" will fight for a share of spoils. Why else is DC ringed by the wealthiest counties in the country? Does anyone else recognize this pattern. And do you want to make our Federal Gov't yet more powerful, by taking over the banks, dictating salaries, demanding school testing, banning smoking, etc. This is the kind of stuff that concerns a libertarian. If the alternative to what we have is a great commune, I think we've seen that movie - it goes against human nature, and ultimately destroys our individuality.
No, our system is not hopeless, at least not yet. Hell, a Bill Gates can still rise on his own mettle. As long as we are able to preserve that, the right of an individual to overcome the "monied interests" - even to become one himself, whether with a slightly larger or smaller Federal Gov't, we should be fine. Certain times demand a more energetic Federal Gov't and this would appear to be such a time. The people (soma and all) chose fairly with Obama, and are not in the aggregate the rubes you might think. Give it a chance.
- ds111
March 25, 2009 at 5:58pm
ds111 - I'm speaking mainly of the financial economy, not the real one. I agree that outside of the investment banking and insurance industries (including, not least, health insurance), we still have for the most part fairly open competition that's not determined largely by proximity to state power. Agribusiness is an obvious exception, but we have fairly robust competition and transparency in tech, manufacturing, autos, retail, aviation.
But the spectacular rise in share of GDP and corporate profits commanded by the financial sector since 1983, plus the equally spectacular favoritism extended to this sector by our political class during this period, and finally, the equally striking migration of so many Democrats into 7- and 8-figure positions at financial firms, all suggests to my mind that, as regards finance, we do indeed have an oligarchy.
- teplukhin2you
March 26, 2009 at 5:03pm